Index funds and ETFs have been outperforming actively managed offerings both in terms of flows and performance for nearly a decade. A changing market environment will soon reverse that trend, said Brad Neuman, VP and Investment Analyst at Alger Funds. ‘Last year only 14% of U.S. large-cap managers managed to bear the S&P 500 and investors have really been voting with their feet,’ said Neuman. ‘This year over $80 billion has flown out of actively managed funds and over $40 billion have flow into the passively managed funds, but with think the intense headwinds are going to reverse and turn into tailwinds.’ Neuman said low interest rates have caused investors to stream into equities with bond attributes like utilities and REITs because of their steady cash flow streams and high dividend payments. Active managers, however, tend to underweight such high-yielding sectors because of their fundamentals, thereby hurting their performance. A switch to higher rates will cure this in Neuman’s view.
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